Five vital questions to ask if a consolidator wants to buy your practice

There is much going on in the accountancy marketplace as far as consolidation is concerned. It seems that a new funder, or model, pops up every week.

We’re determined to help practices make the right decision for them, their staff and clients. Continuing our theme of articles providing the latest views and opinion on consolidation in the sector, we’ve pulled together some key questions for you to consider when thinking about consolidation as an option for your practice.


Q: What is your intent and aspiration for the practice?

A: You would be wise to think beyond the sale point of your practice, because consolidators will often look to leave some ‘skin in the game’ to incentivise ongoing management.

Exiting partners must therefore consider the deal’s impact on salaried partners – or those looking to become a partner. Will the consolidators ‘wipe away’ their aspirations? Perhaps some balance between the payout for those exiting versus financial/equity incentive for those staying on will need to be considered.

Also, bear in mind whether the deal will be beneficial to other staff, and clients.


Q: What will happen to the firm’s branding?

A:  Some consolidators are happy to retain existing branding, certainly for the short- to medium-term. But if an IPO or sale of the group is expected in the future, then the merit of a national brand could be important in attracting new investors and maximising its sale value. Again, a change of brand will require as much communicating as any potential changes in workflow and processes in terms of clients and staff.


Q: Who is funding the consolidator…and who runs the group?

A: There are key aspects to the model and approach taken by various consolidators that you’ll need to get to grips with. Is the consolidator internally funded? Is it geared by established lenders or external investors such as private equity (PE) or venture capital?

Some consolidators are looking at an eventual IPO – and are offering ‘considerable’ premiums compared to usual values. But the question here is…how can they afford a premium above and beyond the market rate?

In that context, if equity partners are looking to sell up and leave with a big payout further down the line, that will inevitably put pressure on the practice they leave behind to ‘pay for them’. For aspiring partners or office managers, their chance of a substantial profit share or return becomes much less likely going forward – with the previous payout being serviced. The upshot of this is it could be difficult to keep able and aspiring team members if they see the rewards likely to disappear with a couple of partners in two or three years’ time.

Then, the management team for the consolidated group will be critical. They are likely to be experienced practitioners themselves, but running a consolidated practice ten times what they’ve been used to, and with a different funding model, requires a different approach. For them it will now be about truly managing, rather than servicing clients while holding monthly partner get-togethers. Quarterly reporting to funders or brokers, while hitting targets, will become the norm.

But as we saw with the previous tranche of high-profile, listed, consolidators, management were unable to streamline and centralise to create value. It is not easy.

(Read more about this topic by clicking here)


Q: What is the timescale for investors’ return?

A: Understanding where the investors in a practice are heading will determine how the deal will impact on all stakeholders, including staff, aspiring partners, retained partners and clients.

For example, private equity will have a term of around five years before they review the investment and plan for an IPO, refinancing or sale. Bear in mind that such options, particularly an IPO or refinancing, will usually require strong performance and year-on-year growth. The KPIs used by the practice may need to change - and cost-cutting/efficiencies will be sought. Centralisation of services and common platforms may be utilised.

Careful management is required to balance out client service versus a ‘homogenised approach’ to product delivery and ultimately fees on retainer. Some compromise may be required.


Q: What model will we operate within?

A: Well, there isn’t a ‘standard’ model. There isn’t even a set timeframe (which will change depending on where funding has come from) for ‘success’.

Foulgers has seen centralisation of service through outsourcing, and the cloud. This is used to drive down costs and lead to a more process-driven approach. It is likely to lead to far fewer staff than in a traditional general practice.

For practices with small fees-per-client and little advisory work then this model is desirable. For the typical sole practitioner, clients can be ported across and the next most senior member of staff can run the practice – albeit reporting into the group.

Whatever the model, there is little likelihood that newly-created offices will be allowed to drift along as usual. In order to satisfy the demands of lenders or PE owners, central management will look on individual offices to be more efficient and improve margins in line with the overall strategy. They will, of course, have to report back regularly and accurately on the performance against KPIs.

If you have any questions about consolidation, or other areas of practice management, contact our experts by clicking here